[Federal Register Volume 63, Number 217 (Tuesday, November 10, 1998)]
[Notices]
[Pages 63097-63098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30099]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40638; File No. SR-OCC-98-09]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of a Proposed Rule Change Relating to Differential Index Options
November 4, 1998.
Pursuant to Section 19(b) (1) of the Securities Exchange Act of
1934 (``Act''),\1\ notice is hereby given that on August 7, 1998, The
Options Clearing Corporation (``OCC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in items I, II, and III below, which items have been prepared
primarily by OCC. The Commission is publishing this notice to solicit
comments from interested persons on the proposed rule change.
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\1\ 15 U.S.C. 78s(b) (1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Under the proposed rule change, OCC will amend its By-Laws and
Rules to provide for the clearance and settlement of differential index
options.\2\
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\2\ The complete text of the proposed amendments to OCC's By-
Laws and Rules is included in OCC's filing, which is available for
inspection and copying at the Commission's public reference room and
through OCC.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, OCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. OCC has prepared summaries set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\3\
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\3\ The Commission has modified the text of the summaries
prepared by OCC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Description of Differential Index Options
The American Stock Exchange, Inc. (``AMEX'') has submitted a
proposed rule change to the Commission to trade differential index
options.\4\ The purpose of OCC's proposal is to provide for the
issuance, clearance, and settlement of differential index options.
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\4\ Securities Exchange Act Release No. 40537 (October 8, 1998),
63 FR 56052 [File No. SR-AMEX-98-12].
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A differential index is a measure, expressed in percentage terms,
of the difference between the performance of one security or index
(called the ``designated interest'') and the performance of another
security or index (called the ``benchmark'') over the life of an
option. The determination of the value of a differential index differs
from the determination of the value of a standard index although both
types of indices have a specific value at any given time.\5\
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\5\ According to OCC, AMEX has proposed to trade Index
Differential Options (a designated index versus a benchmark index),
Equity Differential Options (a designed stock versus a benchmark
index), and Paired Stock Differential Options (a designated stock
versus a benchmark stock).
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A differential index option, like other index options, is a cash
settled option that entitles an exercising holder to receive and
requires an assigned writer to pay an ``exercise settlement amount.''
\6\ In the case of a call, the exercise settlement amount is based on
the extent to which the aggregate current index value exceeds the
aggregate exercise price. In the case of a put, the exercise settlement
amount is determined by the extent to which the aggregate exercise
price exceeds the aggregate current index value. A differential index
option differs from a standard index option in that its exercise
settlement amount is based upon the difference between the relative
performance of two securities or indices rather than the absolute
performance of a single index. The differential index options that AMEX
has proposed to trade are European style, meaning that they can be
exercised only upon expiration.
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\6\ Differential index options are index options even if the
designated security or the benchmark security is an equity security.
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The clearance and settlement of differential index options is
similar to that of other index options. The reporting authority for the
underlying differential index will be required to provide the value of
the index to OCC as of a specified date and time.\7\ OCC will then use
the value of the differential index to determine the exercise
settlement amount. OCC believes that differential index options can
readily be processed, margined, and settled pursuant to the same rules
and
[[Page 63098]]
procedures that apply to standard index options with certain
modifications.
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\7\ Computation of differential index values will be the
exclusive function of the reporting authority.
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2. Proposed Amendments to Articles I and VI of the By-Laws
Under the proposed rule change, OCC will add a definition of
``underlying interest'' to Article I of the By-Laws to provide a
generic term for underlying securities, indices, currencies, and other
underlying interests. In addition, OCC will amend Article IV, Section
11 of the By-Laws to reflect that the term ``index group'' is no longer
defined in relation to index options although it is still defined for
IPs.
3. Proposed Amendments to Article XVII of the By-Laws
OCC will amend Article XVII of the By-Laws, which applies to index
options generally, to add specific provisions applicable to
differential index options and to revise certain terms to be
sufficiently generic to apply to differential index options as well as
other index options. The term ``index group'' will be eliminated
altogether. The term ``index security'' will be added to refer to an
individual security included in an index of securities.\8\ The term
``index security'' will apply to differential index options only when
either the designated interest or the benchmark is itself an index.
Thus, for example, an individual security that is the designated
interest with respect to a differential index is not included in the
definition of an ``index security.'' OCC will add other terms referring
expressly to differential index options which OCC believes are self-
explanatory.
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\8\ In addition, OCC will make technical amendments to the By-
Laws and Rules to conform to these definitional changes.
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OCC will amend Article XVII, Section 2 of the By-Laws for purposes
of clarity. OCC does not intend for this amendment to create a
substantive change.
OCC will modify Article XVII, Section 3 of the By-Laws to make it
clear that as is the case with any other index option OCC will
ordinarily make no adjustments to the terms of a differential index
option if index securities are added to or deleted from or if their
relative weight is changed in an underlying index that is either the
designated interest or the benchmark for the differential index. In
addition, OCC will make clear that it will ordinarily make no
adjustments to the terms of a differential index option having a
security as differential index or benchmark if certain dilutive or
concentrative events occur, such as a stock split, or if certain
extraordinary events occur, such as a merger of the issuer. OCC will
reserve the right to make an adjustment to the terms of a differential
index option only if one of the enumerated events causes significant
discontinuity in the level of the differential index and OCC determines
that the discontinuity has not been adequately remedied.
In addition, OCC will make slight modifications to Article XVII,
Section 4, relating to the unavailability or inaccuracy of index
values, in order to incorporate provisions for differential index
options. In addition, OCC will amend Article XVII, Section 5, relating
to the time for determination of current index value, in order to
eliminate the reference to index groups.
4. Proposed Amendments to Existing Rules
OCC will modify provisions in Rule 207 to accommodate differential
index options. In addition, OCC will modify Interpretation and Policy
.03 under Rule 602, Rule 1801(c), and Rule 1801(e) to remove references
to index groups with respect to index options.
OCC believes that the proposed rule change is consistent with the
purposes and requirements of Section 17A of the Act \9\ and the rules
and regulations thereunder because it applies the same procedures and
safeguards to differential index options that OCC has employed with
respect to other index options. OCC believes that these procedures have
proven effective in promoting the prompt and accurate clearance and
settlement of securities transactions and in safeguarding securities
and funds.
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\9\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
OCC does not believe that the proposed rule change would have any
material adverse impact on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments were not and are not intended to be solicited with
respect to the proposed rule change and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which OCC consents, the Commission will:
(A) by order approve such proposed rule change or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of OCC. All submissions
should refer to File No. SR-OCC-98-09 and should be submitted by
December 1, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-30099 Filed 11-9-98; 8:45 am]
BILLING CODE 8010-01-M
